Jacqui Lennon from Allianz Retire +

This article published in the May print edition of Professional Planner was produced in partnership with Allianz Retire+

The shortcomings of advice for individuals addressing their financial preparedness in retirement is one of the big revelations to come out of the COVID-19 market shocks of recent months.

For those nearing retirement, it’s the realisation that the value of their savings might not be what they expected in the wake of an asset price correction and continued financial market volatility.

For others – those who might not have even thought about their financial preparedness for retirement until now – it’s learning the impact of the removal of a relatively small amount of money, leading to much larger financial ramifications for retirement savings efforts much further down the track.

Since the government announced emergency measures in late March for early access superannuation, the Australian Tax Office has fielded hundreds of thousands of applications, meanwhile many funds have received unprecedented enquiries relating to how they’re navigating through the crisis. Groups such as Super Consumers Australia and The Actuaries’ Institute have since produced guidance on what impact early access to super will have on future retirement savings balances.

Much of the uncertainty relating to individual retirement savings outcomes stem from the industry’s tendency to rely on averages instead of outlining worst case scenarios, according to Jacqui Lennon, Allianz Retire Plus’s head of customer experience and product (pictured).

In particular, averages can fall short when it comes to measuring variable such as life expectancy, vitality of individuals at certain ages, size of retirement balances resulting from income during working years and returns, as well as the coincidence of large market drawdowns happening planned retirement year, Lennon notes.

“At a time when we are having a lot of conversations about policy and statistics and numbers, it’s really important to reflect on the humans at the end of that and to really focus on the people we are trying to solve problems for,” Lennon says, drawing on research relating to biological verses chronological age, health and life expectancy in different countries, high correlations between income and longevity, and probability of significant market events coinciding with segments of the population’s retirement age.

SPEAKING OF AVERAGES

Averages were a hot topic of discussion at Professional Planner and Investment Magazine’s Retirement Conference in late March, particularly among researchers and actuaries including the Grattan Institute’s John Daley and Mercer’s David Knox as part of the ongoing conversation relating to the Super Guarantee and other superannuation policy settings.

Daley builds a case for the government to encourage people to keep more of their working age incomes in the future instead of contributing to super because incomes will likely be lower on average as will economic growth. “History tells us unemployment will be sticky, so unemployment will be high for a long time,” Daley says, suggesting people will be less likely in this environment to contribute to mandatory retirement savings.

Meanwhile, Knox points out that Grattan’s modelling, which averages the level of real income over from age 67 to age 92, undermines the Institute’s assumption that retirement income should increase with price inflation.

The result of its modelling is that the real value of the retiree’s income gradually increases from age 67 to age 92, where the model stops, Knox highlights. Meanwhile he says Grattan is suggesting the age pension will continue to increase with wages, which normally rise faster than prices, Knox says.